Q: I own a cooperative apartment, and it has increased significantly in value in the past several years. This is a leasehold cooperative, and the lease on the land will expire in year 2052. What happens to a coop when the land lease expires? Do I lose my entire investment?

A: This question applies equally to leasehold cooperatives as well as leasehold condominiums. Fortunately, there are not too many of these in the Washington metropolitan area, but a leasehold property is not uncommon throughout the country. Indeed, it is my understanding that a sizable majority of condominiums in Hawaii are, in fact, on a lease.

Lawyers refer to true ownership as holding title in “fee simple”. Under the old common law in England, when the Lord granted an estate in land to the people who worked for him, this grant was conditioned on homage and continued service. The grant of land was called a conveyance “in fee”. We lawyers have continued to hold on to this legal (old English) jargon, and thus most real property is owned in “fee simple”. In a cooperative, the Coop association owns the building -- again usually in fee simple -- and enters into long term lease arrangements with each member owner.

However, there are some community associations where the initial land owner retains the land, and grants a long-term lease to a developer. That developer creates either a condominium or a cooperative association, and in both cases they are subject to the time limits contained in the developer’s lease. Most of these leases are for a period of at least 99 years.

A friend of mine is an attorney who has assisted in the development of many such leasehold condominiums. I once asked him: what happens at the end of the 99 year lease. His response: “I won’t be around to worry about that possibility”.

Obviously, that’s a rather glib answer. But what really happens at the end of the lease term? You should read all of your association documents carefully. They may be able to give you guidance. Some documents will allow the association to extend the lease -- for a price, of course. Other documents will allow the association to purchase the land -- the fee -- again for a price. And some state laws require that the landlord allow the “tenant” the right to purchase at the end of a period of time.

Let’s look at the distinctions between leasehold cooperatives and leasehold condominiums -- but at the outset, it is my belief that both of these concepts pose a potential economic threat to anyone who buys into such a complex:

Leasehold Condominiums: here, the landlord owns the land and either creates a number of leasehold condominiums or grants a lease to a developer who creates those entities. Each owner does not own in fee simple; instead, they only have a lease, for the number of years spelled out in the developer’s lease. In such a condominium, unless there is a law protecting the rights of the owners, it is possible that if the monthly rent is not paid, the landlord can take the property back by filing suit in the appropriate landlord-tenant court where the property is located. Obviously, this is unfair; if, for example, one owner does not pay his/her monthly rent, the remaining owners in the complex should not be penalized and lose their investment.

Indeed, the National Conference of Commissioners on Uniform State laws -- an organization of attorneys, legislators and judges from every state in the United States -- has drafted a Uniform law which has been enacted in a number of states which covers such problems, for the protection of the condominium owner.

The Uniform Condominium Act, or the Uniform Common Interest Ownership Act, permits a limited form of leasehold condominium. The leasehold can be for all or part of the condominium. Under these laws, a leasehold condominium is permitted but only if the lessor joins in the declaration, and the declaration and the statute thereupon provide that the failure of any unit owner to pay his/her share of the underlying leashold rent will not effect the right of the other unit owners. Thus the law effectively prohibits the formation of a condominium on a leasehold where the ground lessor will not join.

However, in those states without such consumer protection laws, the owner of a leasehold condominium buys with a lot of risk. First, the landlord can take the property back if the rent is not paid. And more importantly, at the end of the ground lease, the condomimium unit will no longer exist.

This, obviously, is not a good deal.

Leasehold cooperatives: basically, this is similar to the discussion about condominiums. However, here, the cooperative association -- not the individual owner -- is the tenant. Each member is, in effect, a subtenant of the association, and both are subject to the terms and conditions of the ground lease.

Your lease will expire in the year 2052. Obviously, that’s a long time away. But unless your legal documents -- or the law in your state -- give you (or your association) the necessary protections, it is strongly recommended that you sell as soon as possible, take your profit and invest in fee simple property instead. Incidentally, since your cooperative apartment is an investment property, to avoid having to pay capital gains tax when the unit is sold, you may want to consider a like-kind (Starker) exchange. Section 1031 of the Internal Revenue Code permits cooperatives to be exchanged as if they were real property.

Published: March 10, 2003

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Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of Kass, Mitek & Kass, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts. Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.